When and How to Plan for Retirement

Retirement planning is not in top priority for individuals just starting their career. In fact, some people even in mid-career do not consider it to be a concern. Comparatively lower salaries (for those just starting their jobs) and other recurring and unplanned expenses among popular reasons why individuals defer retirement planning. But by doing so, they are missing out on a simple but vital factor: the power of compounding.

Though it may seem natural to spend money on fulfilling one’s desires, one should understand that they are losing out on the benefits of compounding^[1].

So the simplest answer to the question of when to begin planning for retirement is ‘the earlier, the better.’ Doing so before one settles in on a certain lifestyle creates a discipline which can be hugely rewarding when retirement is knocking on the door.

How Compounding Affects your Retirement

Let’s illustrate this with the following example:

If one was to save Rs 5,000 per month without fail for the next 30 years (but without investing), one would have a corpus of Rs 18 lakhs. But if one would have invested this amount and if it would have earned 5% per annum compounded monthly, the corpus would have stood at Rs 41.6 lakhs which is 2.3 times of the corpus without investment. At the more practical rate of 10%, the corpus would be worth over Rs 1 crore and at a healthy rate of 15%, investing Rs 5,000 a month for three decades would result into nearly Rs 3.5 crores.

It can be seen that the more time one has to invest, the bigger the corpus is. This is due to the power of compounding whose fruits are best enjoyed by investing early.Needless to say that if one can increase the monthly investment as salary increases, one can reap an even bigger reward at the end.

How to plan for retirement?

Start Early^[2]

Investing in equities is a very potent tool to help one build a retirement corpus in the long-term. Since stocks is a volatile asset class and has no guarantee of returns, an investor should start early, even if the size of the investment is small, and invest regularly to ensure that with time, the equity portfolio grows in size. One can invest in a mix of large and mid-caps as well as high growth and mature dividend paying companies. Further, one can take the fund route to equity investing as well.

Investing often is necessary for rupee cost averaging. This strategy required one to invest a fixed amount of money at regular intervals in securities. By doing this, one would get more units of these securities when the prices are low and less units when prices are high. In this way, the cost of investing in these securities is averaged out. This strategy makes investing a disciplined activity and removes the worry of timing the market.This is also the philosophy behind Systematic Investment Plan (SIP) offered by mutual fund companies.

Saving

Saving is a necessary evil which initiates the process of creating a retirement corpus. Even with a low starting, one can put away a little amount every month for investing and then increase this as the salary increases.

Controlling Expenses

One way to ensure meeting that the monthly savings and investment target is met consistently is to control expenses. Creating a breakdown of essential and discretionary expenses every month on a spreadsheet can be helpful in controlling expenses.

Keep Debt Slow

Debts in the form of secured (home loans) and unsecured (credit card, personal loans) should be used on a need only basis and not on the basis of what one wants but can’t afford. This is so as the EMI on loans eats into monthly savings. The bigger the loan and the longer its tenure, the higher is the interest component of repayment.

^[1] https://www.principalretirementindia.com/learning-centre/retirement-planning.aspx

^[2] https://economictimes.indiatimes.com/wealth/plan/10-retirement-planning-principles-that-can-get-the-most-out-of-your-accumulated-corpus/articleshow/63053303.cms